Style analysis and Value-at-Risk of Asia-focused hedge funds

In this paper we identify risk factors for Asia-focused hedge funds through a modified style analysis technique. Using an Asian hedge fund index, we find that Asian hedge funds show significant positive exposures to emerging equity markets. For both a static and rolling period style analysis, our model provides a high explanatory power for returns of the considered hedge fund index. We further conduct a Value-at-Risk analysis using the results of a rolling window style analysis as inputs. Our findings suggest that the considered parametric models outperform a simple historical simulation that is purely based on past return observations.

► Style analysis provides a high explanatory power for Asia-focused hedge fund returns. ► Funds have high exposure in emerging equity markets, cash and investment grade bonds. ► Style analysis combined with parametric models yields appropriate risk quantification. ► Parametric models generally outperform simple historical simulation for VaR analysis. ► Models using Student t instead of Gaussian distribution for fund returns are better.